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Telecommunications: Pulling the Plug on Government Interference Telecommunications: Pulling the Plug on Government Interference October 2007 1301 Connecticut Ave., NW, Suite 400 Washington, DC 20036 (202) 467-5300 www.cagw.org Citizens Against Government Waste Citizens Against Government Waste (CAGW) is a private, nonprofit, nonpartisan organization dedicated to educating the American public about waste, mismanagement, and inefficiency in the federal government. CAGW was founded in 1984 by J. Peter Grace and nationally-syndicated columnist Jack Anderson to build public support for implementation of the Grace Commission recommendations and other waste-cutting proposals. Since its inception, CAGW has been at the forefront of the fight for efficiency, economy, and accountability in government. CAGW has more than 1.2 million members and supporters nationwide. Since 1986, CAGW and its members have helped save taxpayers more than $944 billion. CAGW publishes special reports, its official newspaper Government WasteWatch, and the monthly newsletter Wastewatcher to scrutinize government waste and educate citizens on what they can do to stop it. CAGW’s publications and experts are featured regularly in television, radio, print, and Internet media. CAGW is classified as a Section 501(c)(3) organization under the Internal Revenue Code of 1954 and is recognized as a publicly-supported organization described in Section 509(a)(1) and 170(b)(A)(vi) of the code. Individuals, corporations, associations, and foundations are eligible to support the work of CAGW through tax-deductible gifts. Thomas A. Schatz, President David E. Williams, Vice President, Policy Sean Kennedy, Research Associate Ben Giovine, Research Associate Citizens Against Government Waste 1301 Connecticut Avenue, NW Suite 400 Washington, DC 20036 (202) 467-5300 www.cagw.org Telecommunications: Pulling the Plug on Government Interference Introduction Surfing the Internet or flipping through hundreds of television channels has become routine. Today’s college freshmen are routinely equipped with laptops, cell phones, iPods and a bevy of other devices. The telecommunications industry has been quick to innovate while the federal government slowly adapts to the ever-changing marketplace. This lack of understanding, which has been evident for many years, puts taxpayers and consumers at risk. In his 1984 book that summarized the Grace Commission’s findings, Burning Money, The Waste of Your Tax Dollars, Peter Grace described the technological ignorance pervading the federal government. At the time of the book’s publication, the average age of a government computer was 6.7 years; the average computer used by a U.S. business was three years old. Government computer systems were incompatible and required service technicians specifically trained to maintain the outdated equipment. The extra bodies added $1 billion to the federal payroll over a three-year period. Meanwhile, in the private sector, IBM’s General Systems Division updated its computer technology, saving $360,000 in the first six months after installation. And the Boeing Military Airplane Company’s new word processing system saved $483,000 over a nine-month period. In the 23 years since Mr. Grace published his book and subsequently co-founded Citizens Against Government Waste with syndicated columnist Jack Anderson, the federal government's technological ineptitude has persisted. The current telecommunications debates and the federal government’s temptation to regulate the industry are symptoms of larger problems. While the private sector speeds ahead with more innovation in response to consumer demand, the federal government lags behind trying to play catch up and fails to see the impact of its policies on taxpayers and consumers. This paper exposes four areas where government intervention would harm taxpayers and consumers: a la carte, the Internet tax moratorium, network neutrality, and spectrum sales. Government mandated a la carte programming for cable operators is a classic case of government meddling in the private sector that will ultimately mean less choice and more expense for cable television subscribers. Before the expiration of the Internet tax moratorium on November 1, 2007, Congress can either continue to allow the Internet to flourish and grow or impose unnecessary taxes. Network neutrality could stifle innovation and consumer choice and cost taxpayers millions of dollars in unneeded bureaucracy. Finally, the federal government has billions of dollars in spectrum that it will be putting up for auction in January 2008 and there are questions as to whether or not taxpayers will get the most out of these sales. Citizens Against Government Waste -1- Telecommunications: Pulling the Plug on Government Interference A La Carte Since the 1950s, the cable television industry has been successful in delivering a diverse amount of programming to consumers for pennies per channel. This has been done through a pricing system that places every channel in a certain tier, from lower to higher (or basic to premium). Higher tiers contain some of the more popular channels, and they also give those who purchase them access to all the channels placed in the lower tiers. This bundling system allows consumers choice, yet the federal government is considering regulating how cable companies are allowed to sell their services by eliminating the tiered pricing system and implementing an “a la carte” pricing system. An a la carte pricing system would force cable companies to stop bundling their programming and sell individual channels separately. This system seems tempting because a consumer would only be charged for the channels that he or she chooses to purchase and watch. However, the current tiered system is the best for both cable companies and consumers, and an a la carte system would be detrimental to both. More importantly, if consumers are not making such demands, the government has no business trying to impose a la carte on cable companies. However, the government appears to be about to do just that. On September 11, 2007, the Federal Communications Commission (FCC) began considering a ban on programmers from bundling channels together. With “tying” out of the way, the alternative for cable providers would be an a la carte system. FCC Chairman Kevin Martin has a history of pushing for a la carte. In February 2006, the FCC released a report which advocated a la carte, and declared that cable companies could sell the system in an economically feasible manner. This conclusion reversed FCC findings released in November 2004 by then-chairman Michael Powell. In testimony before the Senate Commerce Committee on November 29, 2005, Chairman Martin said the previous report was based on “problematic assumptions and presented incorrect, and at times, biased analysis.”1 On August 22, 2007 Martin further articulated his support for a la carte in a letter to several minority groups. He wrote, “While I believe all consumers would benefit from channels being sold in a more a la carte manner, minority consumers, especially those living in Spanish speaking homes, might benefit most of all.”2 At issue here is the practice by some cable providers of tying Spanish programming in with blocks of premium channels. Clearly the FCC chairman is trying to drum up support for a la carte; however, this does not make the system a good idea for consumers or providers. The amount of time and energy required to implement such a system would be burdensome. A la carte would require a cable company to provide customers with a checklist to indicate what channels they choose to purchase. It is unclear how a company would do this, but regardless of whether they do it by phone, Internet, or mailings it will require time to compute. It would also cause delays when the a la carte system is first implemented as the cable companies struggle to get all of their customers to select their channels on their new service plan. An a la carte pricing system would also require every home with cable to install a set top cable box called an addressable converter box. An addressable converter box would ensure that all channels not chosen by the consumer be scrambled and all channels chosen by the consumer be unscrambled. Again, there would be another time delay as cable companies attempted to distribute the boxes to all of their customers. There would most likely be a number of inconveniences such as customers receiving channels they did not order and not getting channels they ordered. The FCC’s 2002 survey data Citizens Against Government Waste -2- Telecommunications: Pulling the Plug on Government Interference estimated that the cost of renting such a box is approximately $4.39 per box per month.3 The biggest inconvenience would be the immediate need to modify or replace cable ready televisions. All televisions would be required to have an addressable converter box, making it impossible to get cable television access by simply plugging in a coaxial cable from a wall into the back of a television as current cable-ready televisions are able to do. A la carte pricing would also drastically change television advertising, ultimately making an a la carte system more expensive than a tiered system for consumers. The General Accounting Office (GAO) reported in 2004 that, “Adopting an a la carte approach… could alter the current business model of the cable network industry wherein cable networks obtain roughly half of their overall revenues from advertising. A move to an a la carte approach could result in reduced advertising revenues and might result in higher per-channel rates.”4 Advertising companies sell their commercial advertisements hoping to reach a diverse audience and would no longer be able to accomplish this under an a la carte pricing system. For example, a company might run an ad on ESPN hoping to reach primarily sports fans, but also reach others who might have a casual interest in the channel or those who might be surfing through channels. Reaching such a broad audience would be nearly impossible through a la carte TV because of channels’ reduced take-rates (the percentage of a cable subscribers’ subscription to one particular channel).
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